Igaming Focus: Regulated icasino is long-term key to U.S. growth By Jake Pollard, CDC Gaming Reports July 6, 2021 at 8:00 am The U.S. igaming industry is in hyper-growth mode at the moment, but much will also depend on whether current regulatory levels continue, especially with regard to icasino. The U.S. igaming industry is currently described as being in a phase of hyper-growth, and looking at the numbers and the levels of investment, start-up, buyouts or listings activity surrounding it, this is an accurate description. The market is described as being in hyper-growth because it is in its earliest phase, with so much of its potential to be realized. However, this potential is very much dependent on ongoing and broadening regulation across many states, and the regulatory scenarios in the most important jurisdictions (Florida, California et al) are still to play out with regard to which groups – commercial operators or tribal gaming interests, in other words – will get licensed and under what conditions. A run through many of the investor presentations and results statements from operators shows that the scenario of strong growth and rising total addressable market (TAM) is very much based on expanding regulations. When it comes to verticals, the difference between online sports betting and icasino is also clear. Many executives are on record as stating that icasino is where the money and real value are when it comes to margins and profitability; and for many online sportsbooks, the prospect of getting icasino products regulated is why (to an extent) they keep funding current sports betting losses to such levels. Icasino rollout in doubt Research by analysts confirms this. The June report by Deutsche Bank looking at igaming numbers and potential regulatory scenarios shows that the Michigan icasino market recorded gross gaming revenues (GGR) of around $80m in February, just after the state had gone live with regulation. This was followed by $95m in GGR for March, April and May. “To put this in perspective,” DB says, New Jersey “hit $80m monthly GGR mark in its 78th month post-launch, which happened to coincide with pandemic-related lockdowns in the state in April of 2020.” Allowing for the fact that Michigan has approximately 11% more adults (over 21s) than New Jersey, the results are strong even when adjusted to population sizes. The research adds “that it is highly likely that operators in Michigan have been incredibly promotional in the year-to-date, as the land grab efforts play out.” The case for ongoing and broad industry growth is based on favorable icasino legislation across additional states that would make the vertical the driver of growth for years to come. But other than Michigan, DB’s report says “no state has legalized commercial icasino gaming in the aftermath of the pandemic, other than the two tribal licenses in Connecticut, and Michigan was approved for icasino, though it hadn’t launched prior to the pandemic.” The pandemic has certainly proved the value of online gaming and betting, and in general has pushed states to regulate sports betting much more quickly than they might have done. However, when it comes to icasino regulation, DB says it finds “the theme of the pandemic making icasino legalization a likely source of funds for states, far less likely now, post-bailouts, than perhaps was the case 6-12 months ago, especially given the lack of progress by front runner states, namely Indiana and Illinois. “As such, we think the rollout of icasino is likely to be a lot more challenging than most expect, and far more challenging than sports betting. Coming into 2021, Indiana and Illinois were the two larger states that were contemplating icasino legalization. While Indiana has already failed to act on icasino and won’t in calendar 2021, we believe Illinois could also face challenges and we believe the prospects of icasino have dimmed for the state of late.” In its May report, DB also mentioned potential cannibalization of traditional casino operations would “lessen the desire of certain casino operators, who haven’t had success in icasino, or aren’t well positioned to succeed in the vertical, to push for legalization.” No betting tax boon Additional factors coming into play include the fact that sports betting is more acceptable socially, no doubt aided by the amount of above-the-line marketing, betting and editorial sports content generated by mainstream media outlets and the high-level partnerships sportsbooks have penned with leading sports leagues. In terms of tax generation, however, sports betting is not the boon some might have expected. For example, the DB report quotes Massachusetts State Senator Eric Lesser as saying the tax take from sports betting will be “significant and helpful, but it’s not going to be…what the lottery currently is ($5.2bn in total revenues, $979m in net profits for the state in 2020).” Deutsche illustrates the point by looking at per capita spend in states with a “single provider model”. “To date, only two states are annualizing >$10 in per capita tax revenue to the state, and each of them is a high effective tax rate model. While the history is relatively short, and each of these states does benefit from tourist play, which inflates their organic GGR productivity, the differences in per capita tax revenue to the state in states like Rhode Island ($14.31 per adult) and New Hampshire ($11.91 per adult) and places like New Jersey ($7.18 per adult) or Pennsylvania ($5.94 per adult), are difficult to fully ignore.” This can also impact states’ potential regulatory models. If they feel a single model provider, or one where (for example) only tribal casinos are allowed to operate sportsbooks, will generate higher tax revenues, there won’t be much that commercial brands are able to do about it – apart from lobbying intensely, as shown in Florida recently. And this will be mirrored by tribal gaming interests across other states, who will lobby as hard as Florida’s Seminole to make it very hard for online operators to get licensed in their jurisdictions. As with any newly-regulated industry, such undercurrents are not surprising and the overall context is very positive for U.S. igaming and betting. The quoted research, however, provides important context to the high-profile headlines.